Nov. 3, 2013 - 03:45AM
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Mike Petters has transformed his company from a division of Northrop Grumman to a publicly owned, self-sustaining corporate entity that is the largest military shipbuilder in the US. With the standup in March 2011 of Huntington Ingalls Industries (HII), Petters repeatedly said his first goal was to stabilize the new company. Two and a half years later, his Newport News Shipbuilding division is thriving, with more than 23,000 employees working on nuclear-powered aircraft carriers and submarines, and set to christen the carrier Gerald R. Ford on Nov. 9. The Ingalls division along the Gulf coast is ending shipbuilding at Avondale, La., and closing the composite facility in Gulfport, Miss. While the Ingalls yard in Pascagoula, Miss., is busy, potential cuts in the US Navy’s shipbuilding plan could hurt.

Q. How do you assess the overall health of HII?

A. I think we’re doing what we said we were going to do. A lot of people now can see into the business with a lot more visibility than they may have had when we were part of a larger company. As a result, we end up transmitting what our plans are. Everybody gets to see whether we get it done. If you do what you say you’re going to do, that starts to build confidence and that’s been our approach.

Q. It seems the situation at Newport News is pretty busy right now, with three carriers in the yard and two submarines a year.

A. We’ve got a pretty good, healthy workload here, and we’ve got a couple of things in play — the next carrier and the next flight of submarines — that will keep us moving along, so we’re going OK in Newport News.

Q. Down south, the Ingalls yard seems to have improved, but the future depends on the Navy getting the money it needs for shipbuilding.

A. Ingalls has the highest backlog they’ve had in a decade. We just competed successfully in the destroyer program, we’re off to a really good start on the [amphibious assault ship] LHA 7 and [amphibious ships] LPDs 26 and 27. The question around Ingalls is really more of a macro question about the US Navy, and the Navy’s plans about the future of amphibs. How’s the future plan for destroyers to come out? What’s the timing of that? How does that work? How does that fit with the workload and progress that we’re making there at Ingalls? That’s not a reflection on the workforce or the team at Ingalls — they are doing a great job. The issues at Ingalls are more directly affected by some of the perturbations going on in the nation’s capital.

If you listen to the things that we talk to our shareholders about, they’re the same things that we talk to our employees about, which is the same thing we talk to our customers about, which is we need to come together to find a solution for the future of amphibs. We’re coming to the end of the LPD line, and between the follow-on program — a smaller version that is the LXR program — there’s a gap [of several years]. How do you solve that gap? When do you solve it? That’s the discussion that’s going on right now, but we’re doing that not from a position of weakness. We’re doing that from a position of success, in that the ships we’re delivering are high-quality, high-caliber ships the Navy is anxious to have, and we’re doing this in an environment where we’re successfully competing.

Q. How does the constant uncertainty in Washington affect you?

A. I hate to say it would be the new normal, which is what a lot of folks are suggesting. The trap you fall into is that the products we build and the decisions we make are strategic in nature. For instance, we’re talking about amphibs at Ingalls three to five years from now. That’s kind of the mid-term of our horizon. We have a horizon that’s very long. You need to have these strategic discussions about bringing together all of the successful forces to make the program work, whether it’s workforce development, supply chain or capital investment. It takes time and investment to bring all of that together.

When you bounce from a six-month continuing resolution [CR] instead of a 2013 budget, and you have a sequester laying over top of that, and then you go to [a fiscal 2014] shutdown, then you go to a CR, then you have debt ceiling issues and you have another CR. I mean, you’re moving to a CR in January. Why would January be any different than what you had in October? Guess what — now you’re talking about what’s going to happen over the next few weeks as opposed to the more strategic discussions about how we go and solve and make successful these larger programs. So if this is the new normal, this is a really bad idea. The shutdown got us into the position where my chief financial officer and I were monitoring daily cash receipts. It turned out we were not affected, but we did not know that.

We were closely monitoring this to make sure that if we got to the point where we were not being paid, we would move to another level of discussion. We never got to that point, so you could step back and say we were not affected by it.

But I can tell you that I’ve been the CEO of this Fortune 500 company now for two and a half years, and the first time I monitored daily cash receipts was while the government was shut down. I think that if you’re sitting in a position where you should be having a strategic discussion, and the environment forces you to be monitoring daily cash receipts — which is anything but strategic — then that’s consuming time that would be better spent on more important, bigger issues.

We’re not the biggest player on the table here. There are a whole lot of defense companies who are a whole lot bigger, who have a lot more at stake, who were being affected the same way or even more dramatically than we were. If everybody’s consumed by this daily transactional kind of activity, we’re not having the right strategic discussion, the customers can’t have it. The industrial base can’t have it. And that’s bad. That’s why I bristle at the idea that this is somehow the new normal. If this is the new normal, it’s not good for the country.

Q. The Government Accountability Office (GAO) recently released another report where they criticize your performance on the CVN 78 aircraft carrier program. What’s your response?

A. When you start talking about these highly complex programs, you think about bringing the industrial base together, the workforce together, the supply chain together, the technology together, the research-and-development investment that has to be made. Then go into it and ask how much risk is there. There’s a lot of risk. Let’s contract for that in a way that there’s sharing. That the contractor actually has responsibility for the risk that the contractor can retire and has incentives to retire that risk, and that there’s risk that the government’s going to assume the responsibility for. When you have a situation like that, and you have a budget environment that basically says, anything that’s over budget is bad, and everything that is under budget is good, you have a collision, I think, of language.

Let’s say the contract assumed 100 percent of the risk would be retired. And the team down there does a heroic job of retiring 80 percent of the risk. They should be heroes. But they’re bums because that 20 percent of the risk takes them over budget.

But if you step back and ask what problems have we solved, and are we bringing this program to the taxpayers in the most affordable way, I would tell you we are. The folks down there are retiring risk every day. We have seen the quality of the outfitting, the quality of the integration, the technology that’s going in for a lead ship. This is the very best lead ship I’ve ever seen come together. And if it’s going to be the largest ship that the Navy has and the largest single budget line item, isn’t that what you want?

Q. The GAO recommends delaying the major contract award for CVN 79, the next carrier, until the risks are better understood. Would that result in any cost savings?

A. No. I don’t know what you really mean by delay. We’re already building units for 79. We’re doing advanced construction, getting ready for the detailed design and construction contract. If you said stop doing that for a couple of more years so we can see what the cost returns are on 78 before we go back to doing that again, that would absolutely raise the cost of the 79. I don’t think that anybody would seriously contemplate that. Now if you say let’s delay the detail design and construction contract, all you’re really doing in that case is you’re delaying the discussion about how are we going to share the risk of the second ship.

But we expect the second ship contract to be [one] where there’s going to be more risk on the contractor. The thing that we need to do is make sure we maintain the continuity between the first ship and the second ship. A delay of any amount of time runs the risk of breaking that continuity.

Q. The CVN 79 contract had been scheduled for signing by the end of September, but negotiations continue. Do you expect that to be concluded soon?

A. I think we’re in a place where we’re probably going to be going down the advanced-construction path a while longer. We’ve done that before. My view is that you end up paying for risk whether you retire it, whereas if you get into the contract, you actually have a chance to capture the savings from retiring the risk. You can take that out of the baseline. But there’s a point in time where you just have to bite the bullet, and move ahead.